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Kmart Saw $2.42 Billion Loss in 2001,
Is Being Investigated by U.S. Attorney

By

Amy MerrickStaff Reporter of The Wall Street Journal

Updated May 16, 2002 1:00 a.m. ET

Detailing for the first time the disastrous results that contributed to its bankruptcy-law proceedings,
Kmart Corp.
reported a $2.42 billion loss for its most recent fiscal year and restated its quarterly financial statements.

The discount retailer also quantified the first-quarter charge it will take -- $600 million to $800 million -- to cover its previously announced plan to close 283 of its 2,114 stores. And Kmart, which has been reviewing its accounting practices internally for months and is under investigation by the Securities and Exchange Commission, also disclosed that the U.S. attorney's office in eastern Michigan is investigating the company.

The Troy, Mich., retailer said its loss amounted to $4.89 a share for the year ended Jan. 30, which was eight days after the retailer sought Chapter 11 bankruptcy-law protection. For the previous fiscal year, Kmart posted a loss of $244 million, or 48 cents a share.

For the year, sales declined 2.4% to $36.15 billion from $37.03 billion a year earlier. Sales slipped 0.1% at stores open at least a year.

For the fourth quarter, crucial to retail results, Kmart said sales declined 6.5% to $10.88 billion from $11.64 billion. The company posted a net loss of $1.57 billion, or $3.15 a share, compared with net of $249 million, or 48 cents a share, in the year-earlier quarter.

In its most recent fourth quarter, Kmart took a charge of $979 million to write down assets, primarily related to the 283 stores it will close. In addition, the company took a $958 million charge to write off deferred tax benefits and a $75 million charge related to an inventory decline in January. Also during the quarter, the retailer posted gains totaling $353 million relating to its Chapter 11 proceedings and other actions.

Absent those charges and gains, Kmart said its loss would have been $327 million, or 66 cents a share. That result includes the effects of certain restated results in earlier quarters.

"These results reconfirm the significant difficulties Kmart experienced last year, including unsuccessful sales and marketing initiatives, an erosion in supplier confidence, and below-plan sales and earnings performance in the fourth quarter -- all of which were factors in the decision to file for Chapter 11 bankruptcy protection," Chief Executive James B. Adamson said in a statement.

Kmart has said it began investigating accounting and "other" matters after it received an anonymous letter in January that purported to come from Kmart employees. Wednesday, Kmart disclosed that it has received copies of other anonymous letters -- expressing concerns about "various matters" at the company -- that were sent to the Securities and Exchange Commission, Kmart auditors PricewaterhouseCoopers, Kmart directors and its lawyers. The company said it is "cooperating with the SEC and the U.S. Attorney's Office for the Eastern District of Michigan with respect to their investigations of these issues." A Kmart spokesman wouldn't elaborate.

The SEC has previously declined to comment on the matter, and calls to the U.S. attorney's office in Detroit Wednesday afternoon weren't returned.

While Kmart has provided few details about its internal investigation, it has said that it is reviewing the "stewardship" of the company under its previous management, whose severance pay has been suspended. Kmart said Wednesday that it expects to complete its review of the concerns alleged in the anonymous letters by September. As a result of its accounting review, Kmart said it should have recorded an upfront payment from one of its suppliers over the full term of the contract, rather than all at once. The change reduced the previously reported second-quarter earnings by $28 million after taxes, or six cents a share, and increased third-quarter earnings by $10 million after taxes, or two cents a share.